Key Analyst Sees Continuing Headwinds for ADM

One key analyst still views Archer Daniels Midland Co. (NYSE: ADM) as a longer-term core ag holding. The firm also believes that near-term operating headwinds will persist for a couple more quarters. ADM is also feeling a large macro impact as well.

Merrill Lynch downgraded ADM to a Neutral rating from Buy on lack of near-term fundamental catalyst. The firm does not see the current operating headwinds improving much over the next couple of quarters. The stock has outperformed the market year to date and is approaching the price objective of $40.

The company continues to be affected by a strong U.S. dollar, which has hurt its U.S. export business. Ethanol industry margins currently are around breakeven on an EBITDA per gallon basis, and crush margins are well below year ago levels. Based on Merrill Lynch’s industry work, as well its Global Research currency forecasts, the firm does not see any of these headwinds improving markedly in the near term to serve as a positive fundamental catalyst.
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The firm detailed in its report:

We are lowering our fiscal 2016 estimate to $2.50, down 3.5% year-over-year, since we now believe crush margins, particularly in the US and Europe could move lower before moving higher as the industry enters the South American harvest which is likely to increase crush rates, particularly in Argentina. As a result, we see greater potential for downward, albeit modest (consensus $2.59), earnings revisions in the near-term than we do positive revisions unless one of the factors discussed above improves.

The Agribusiness stocks have meaningfully revalued since last summer, somewhat with the market and the broader ag sector, but also due to the operating environment, which has become increasingly challenging more recently. While some may question why we are downgrading now with the stock down approximately 25% since its late May highs, we cite three factors: (1) the stock has outperformed the S&P 500 year to date and is approaching our $40 price objective, (2) ADM has outperformed BG by approximately 23% year to date, despite the operational headwinds discussed above and (3) ADM’s p/e multiple has expanded by almost three points over the past month to 15.1x our fiscal 2016 EPS estimate or a 30%+ premium to Bunge (BG).

Shares of ADM were trading up 1.5% at $37.09 on Monday, with a consensus analyst price target of $36.40 and a 52-week trading range of $29.86 to $53.31.